Quick Thoughts on Reinhart and Rogoff's Response

Tuesday, 16 April 2013 16:51

Carmen Reinhart and Ken Rogoff (R&R) responded to the paper I noted earlier by Thomas Herndon, Michael Ash, and Robert Pollin (HAP), which showed that their famous result associating high debt levels with slow growth was driven by spreadsheet errors. The gist of the response is that HAP also find that high debt is associated with slower growth, and that other studies (including one of theirs) found the same result anyhow.

The first point is highly misleading. It is true that in most of their specifications HAP found growth was slower in periods with debt levels above 90 percent of GDP than below, but the gap was relatively small and nowhere close to statistically significant. Furthermore, they found a much bigger gap in growth rates around debt-to-GDP ratios of 30 percent. If we think that R&Rs methodology is telling us something important about the world then the take-away should be that we want to keep debt-to-GDP ratios below 30 percent.

If R&R had produced the correct table in their initial paper no one would have taken seriously their claim that the 90 percent debt-to-GDP ratio presents some sort of cliff. The corrected table in no way supports that view.

As far as turning to other work, these papers should be examined. Publishing papers complaining about government debt loads is clearly a growth industry in an otherwise weak economy. But these papers have absolutely zero relevance to the HAP's critique of R&R's original paper, which has in fact played an enormous role in policy debates. HAP can hardly be criticized for focusing on the leading paper in this framework and not addressing the derivative versions.

Btw, since I had questions in comments and e-mails, I will briefly repeat one of my main points on this debate. The federal government owns literally tens of trillions of dollars of assets. The most obvious form of these assets is land, but it can also sell off fishing rights, use of the airwaves, and even patent and copyright monopolies. If we actually believe that high debt ratios impose some severe burden on future growth then nothing stops the federal government from selling off $5 trillion in assets and reducing its debt-to-GDP ratio by 30 percentage points.

Note there is no entry in a debt-to-GDP ratio for assets, just liabilities. So if we believe the R&R story, then we can increase the growth rate through this sort of asset sale.

Just to be clear, I think this is absurd. If we are doomed to slow growth because we have a debt-to-GDP ratio of 100 percent of GDP, it can't make any sense that we free ourselves from this burden by selling huge amounts of coastline or whatever other assets can get us up to $5 trillion. I mention this possibility to point out the silliness of the R&R view, not because I think that a massive asset sale would be good policy.